Tax Withholdings For Non-Resident Sellers
BE CAREFUL - FEDERAL & GA WITHHOLDING RULES EXPLAINED
If you are a buyer or seller who is a resident in a different state, or possibly a different country altogether, you must be aware that you could be subject to a large withholding of proceeds at Closing.
Below is a short description of the two statutes.
1. GEOGIA WITHHOLDING - 3%
Here is a common scenario: Bob bought a Property for his children while they were attending school, but now hopes to sell this upcoming Spring. Bob has asked you to list the property, and asks for a "net to seller" so that he can be prepared regarding his expenses.
Issue - Bob is a resident of Florida!
Per Georgia statute: Nonresidents who sell or transfer Georgia real property are subject to a 3% withholding tax. The rate of withholding is 3 percent (%) of the sales price. An alternative for calculating the withholding is to use the seller’s gain (see O.C.G.A. Section 48-7-128).
The law is designed to make sure Bob pays his Georgia state income taxes. Due to being a resident of Florida and not Georgia, Georgia collects this amount up front and requires that Bob file a Georgia return to claim any portion of it back that he may be owed.
Though Bob may be able to claim an exemption to the standard withholding rule (no gain, low sales price, etc.), Bob should discuss this with his accountant and be prepared to have this amount withheld at closing.
2.FEDERAL WITHHOLDING - 15%
Another common scenario: Mary bought a property several years ago in Georgia with her husband but they have since been moved back to Europe permanently. Due to her status as a "foreign person" there is a requirement to withhold 15% of the sales price at closing! This is in addition to the 3% Georgia withholding, bringing the total to 18% potentially.
FIRPTA is a tax law that imposes U.S. income tax on foreign persons selling U.S. real estate. Under FIRPTA, if you buy U.S. real estate from a foreign person, you may be required to withhold 10% of the amount realized from the sale. The amount realized is normally the purchase price.
In Mary's case, if the sales price is $250,000 there could be a withholding amount of $45,000 (18%)! Similar to GA withholding, the Federal government is ensuring that the seller file a Federal tax return in order to claim any portion of the withheld amount. Importantly, this is also the case even if there is not $45,000 in equity on the sale - the Seller would have to pay this regardless!
There are several accountants that will prepare a tax return on behalf of the Seller in anticipation of selling the Property. If done ahead of time, the Seller may be able to avoid withholding the full 15%-18% at Closing and only pay what they owe. Feel free to reach out to me for a referral in the event this would apply to you.
courtesy of Christian Ross, Esq., Campbell & Brannon, LLC, Real Estate Closing Attorneys